Want to solve the tax gap? Don’t look back in anger when it comes to reform

Tuesday’s (11 June 2019) report from the Social Market Foundation claims that one in three people who file income tax self-assessments are paying less tax than they owe – costing HMRC some eight billion pounds in uncollected revenue.

The paper suggests that self-employed people, who make up 43 per cent of all self-assessment taxpayers, are more likely to under-report, particularly those within the construction, transport, and hospitality sectors.

To combat this, the report makes a heavy-handed and narrow-minded recommendation: spend more money on new HMRC auditors to undertake targeted inspections. As political parties look for easy solutions to bring in more money to fund public spending, this may seem appealing but it is not a practical solution.

If government wants to bridge the ‘tax gap’ it would be better to modernise and simplify the tax and employment system altogether – rather than trying to retroactively chase up individual cases of inaccurate form-filling.

The first thing to challenge is the common misconception that the self-employed are not paying their fair share. The solo self-employed already contribute £275 billion each year to the UK economy – enough to fund the NHS twice over. While freelancers do pay different tax rates than those in traditional employment, they are taking a risk – usually to do something innovative or productive for the economy as a whole.

Second, a bigger issue is that our tax system, based as it is on the traditional employer/employee model, is overly complex and no longer fit for purpose. A recent report by the Centre for Policy Studies found that only 22 per cent of those running small businesses think the tax system is sympathetic to their needs. Just one per cent think it is too simple rather than too complex. Misjudged policies affecting the self-employed, like IR35 and Making Tax Digital, have only added to this burden.

Lastly, self-employed people already face several financial challenges, from chasing up late payments to accessing mortgages and pensions. IPSE surveys have found nine in ten self-employed people worry about their financial situation and half say they feel anxious or stressed as a result. Introducing a new army of taxmen into this already complicated environment to pore over their finances in greater detail is unlikely to help.

Self-employment is on the rise and now accounts for around one in seven of the total workforce. Ultimately, the factors driving this transformation are to do with structural changes in the economy, from new technologies to shifting attitudes about work-life balance, not dodging tax.

This is why IPSE is calling for a fundamental review of the UK’s tax system and how it affects small businesses and the self-employed. Alongside this, there is also a need to deliver a statutory legal definition of self-employment to bring clarity and remove the cloud of uncertainty hanging over many freelancers about how they should be classified. Together, these measures could put the building blocks in place for a better approach that works for both taxpayer and government.

If politicians want to get serious about bridging the tax gap they should be thinking forward, not looking back, about how our employment and tax frameworks can be modernised and simplified in future.